Spectacular. That is the best way to describe a long-term investment in a Victorian taxi licence plate.The total return from a plate over the 25 years to 2010 averaged almost 17 per cent every year. That is roughly 50 per cent more than the returns for those who have ridden out the property and share booms and busts.

But now the taxi ride is over in Victoria. The locked-up shop, pretty well guaranteed under former premier
Jeff Kennett
, is opening up. The structure that funnelled cash out of the pockets of customers, drivers and operators ever upwards is on the way out.

And, for some, it hurts. If you want to get an idea of how much it hurts, just look at images of the elderly men who were hanging off the suit of independent state MP
Geoff Shaw
and abusing him recently as he made his way into Parliament. They believed they had worked hard to build an asset now taken away by the state.

Behind the fury are reforms that have caught the attention of other states even though a very public wedge has been driven between Kennett and the Liberal Party.

AFR
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To understand it all, one must first grasp the commercial structure of the sector. There are, firstly, drivers who get a share of the fares from the meter with the remainder going to the operators of taxis. The operators may or may not own the licence or “plate".

If they don’t own it, they lease it from the plate owner for a monthly assignment fee. These days that sits at about $2200 a month down from about $2500. It is this cash flow, worth about $30,000 a year historically, that drives the basic value of the plate.

What turbo-charged that value was the fact that plates were granted in perpetuity at the same time as there was an effective ­government ban on new plates being issued. ­Little wonder plate values tripled to more than $500,000 in the past 20 years.

Emphasis on consumer choice

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Enter
Allan Fels
. The former head of the Australian Consumer and Competition Commission (ACCC) headed a two-year ­Victorian government review of the industry and has sought to tip it on its head.

Fels reasoned that the incentives and rewards in the much-maligned system were geared towards the licence holder who had no interest in improving customer service.

Fels, in his report, says this effectively ­created a closed shop and poured $120 million of value a year into the pockets of the plate owners at the expense of customers. His report emphasised the need to engender competition and to empower customer choice through unpicking this structure, among a raft of other sweeping changes.

But he stopped short of recommending open-slather entry for licences with no fee or no limit on numbers, out of concern for the financial harm this would cause incumbents. Instead he proposed the government issues licences to anyone who wanted one at a fee of $20,000 a year. The state government accepted this recommendation but lifted the fee to $22,000. Crucially Fels, and subsequently the government, decided drivers also ought to get a minimum 55 per cent of the fare box at a cost to operators of about $7000 a year.

Fels argued this meant the cost of leasing a cab from an existing plate holder or paying the new fee to the government was about the same – which would deter a flood of new entrants at a time when the sector’s demand is weak. Fels’s best guess was the number of taxis would increase by 5 to 10 per cent.

Another former ACCC commissioner,
Graeme Samuel
, was installed to oversee implementation of the reforms, including a three-year remit to decide whether any new licences should be issued.

The argument against new licences is that cab occupancy rates hover at about 25 per cent. For every minute the meter is ticking for a passenger, a driver will spend three minutes looking or waiting for one.

“If the often-quoted statistic of 28 per cent occupancy is correct, there does not seem to be a great priority to issue new annual licences," Samuel says. “You don’t have to be an economics professor to accept that if you have a 28 per cent occupancy rate, even if it was 50 per cent, you wouldn’t want to issue a large number of licences – if any at all."

But for that to remain the case he wants to see licence holders continue to drop their assignment fees to approach the government’s proposed new licence fee.

“The numbers are starting to come through which is reflecting a more fair and reasonable approach in dealing with assignments. If not, we will respond to demand and issue new annual licences. Timing will probably be in the first half of 2014, but might be earlier," he says.

Adapt or get weeded out, say reformists

The value of plates has fallen sharply but may have floored. Today plates are traded for a bit under $300,000 – almost precisely where Fels suggested they would end up.

Angry plate holders claim they could fall further and that banks are assigning a nil value to a once-valuable annuity-style asset (something the banks and the government hotly dispute).

Samuel cites written advice from the banks that they are assigning loan-to-val­uation ratios of about 60 per cent and treating plates at pre-existing book values.

His message is that operators, owners and drivers will need to adapt to the new environment to succeed.

He is also puzzled at the push for higher fares across the board in a concurrent review of fares by the Essential Services Commission. The regulated fares have not moved since 2008 but he says the main issue with fares is that short trips are not worthwhile for drivers.

“When you have that level of use of your service, the last thing you would do is suddenly increase your fares or costs and prices before you turn around and say you will provide a better quality service," he says.

“It is like the corner milk bar or the small corner service station. Those that adapted to changing consumer demands thrive; those that don’t, languish or fail. The whole philo­sophy of these reforms is to bring some real competition into the market."

No compensation for plate holders

These reforms have a long history stretching back to the national competition reform of the 1990s. At that time, as Premier Kennett pointedly refused to have taxis deregulated, some argue that strenuous defence set the fire under plate prices. Kennett, who is still campaigning on behalf of the rights of plate owners, says today that it was not his intention to set off a price spiral.

Compensation for plate holders is perhaps the most contentious issue. Fels, in his inquiry, points out that, since 1983, there has been an explicit provision in Victorian legislation ruling out compensation for changing licence terms. He acknowledges some of Melbourne’s 4300-odd licence holders, particularly those who had bought since 2007, would be hit hard. He put about 450 owners in this category and suggested “tightly targeted assistance where such financial difficulties can be demonstrated".

That did not fly with an unapologetic Transport Minister
Terry Mulder
. He says plate owners are speculators who should have seen the very clear letter of the law.

“We are now out to get some major structural reform through the industry. We view it as an extension of our public transport," Mulder says.

He adds that the government had decided to set the annual cost for a new leased licence at $22,000 plus inflation as a way of limiting the damage to existing licence holders.

“There are a handful on the steps of ­Parliament. Others, who have a better understanding of the circumstances, will understand they will have to run their business a lot better," he says. “It is about taking as much cost out of the base as we can for the operators."

Mr Mulder says he knows of at least one regional operator who was going to buy new white cars because he could now save the $3000 on painting them yellow.

Kennett blasts all those involved – including Fels and his one-time protégé, former premier
Ted Baillieu
– over the reform package, but is particularly incensed at the lack of compensation.

“What is fundamentally wrong is that people have operated and worked under circumstances of good faith, where they have bought assets over time, where they have worked hard to earn a licence, and the government has gone and changed the rules that have destroyed the value of their asset.

“If you came and destroyed the value of my house I would be upset. I have never seen a group of people treated so badly and ­disgracefully."

A lot of pain for nothing, says former premier

Fels anticipates in his report that there will be political pressure not to push on. He urges the government to resist.

“It will be essential for the Victorian ­government to ‘hold the course’ during the early years of reform to allow the industry to adjust to the new policy settings."

Kennett says plate owners have been “totally screwed" but he says the true fallout won’t be seen until 2017 when the three-year control period expires.

“I don’t think this is going to deliver the sort of service that Fels and Samuel are talking about."

Kennett insists the market for plates has dried up. He bats away the taxi commission data, demanding to know who was behind the trades. He also has little time for assurances from the banks that they have continued to lend against licences.

“After a year or two years a lot of people will have come a cropper."

Kennett is deeply affected by the cases he says he has seen of personal hardship. The day The Australian Financial Review spoke to him, the former premier had sat with a pair of elderly ladies who owned three plates between them.

“The government gets away with this because there are so few people involved."

Kennett insists he supports reform and competition in free markets but not “unfairness".